The eurozone flash PMI disappointed in May when it unexpectedly fell for another month to 54.1, from previously 55.1. Hence, after showing signs of stabilising in April, the sentiment slowdown gained speed again in May. This is the lowest sentiment reading in 18 months and it causes further questions on whether the economic weakness in the first quarter was temporary and dampens the potential for a rebound in activity in the second quarter. Hence, given that the June PMI maintains the May level, it suggests that annual GDP growth decreases a notch further in second quarter (see figure). Even though PMI seemed too high at the turn of the year and has now adjusted down to actual growth, the further fall causes questions as to whether the first quarter GDP slowdown was merely of transient nature.

Weakness found within both services and manufacturing

The eurozone Service PMI decreased to 53.9 in May from previously 54.7 and we attribute this to the recent softer readings of retail sales as well as a slower pace of falling unemployment. Today’s surprise rise in first quarter unemployment in France highlights this, and French service PMI proved especially weak in May. Somewhat robust consumer confidence thus fails to spill over to business sentiment; eurozone consumer confidence for May is due later today and expected to increase slightly, supported by higher stock prices but tempered by higher energy prices. The eurozone Manufacturing PMI decreased to 55.5 in May, from previously 56.2. German Manufacturing PMI was especially weak, falling for a fifth month, probably burdened by protectionist concerns as well as higher energy prices and the effects of the strong EUR earlier this year. The German Composite PMI thus reached a 20-month low in May.

Growth expectations challenged further

At the last policy meeting, the ECB acknowledged that incoming information pointed toward moderation, but suggested that it might be due to temporary factors. The May PMI certainly challenges this view and add to this that the PMI sub components of employment and output prices both edged further down in May. We think that the May PMIs highlight the fact that eurozone growth peaked at the turn of the year, but we continue to expect that the slowdown will be gradual, and hence do not expect the PMI to continue to decline in the coming months. However, for now, the weaker sentiment will likely push further for generally lower growth expectation for this year.